CWS Market Review – March 7, 2014

“The best stock to buy is the one you already own.” – Peter Lynch

I can’t remember a week that started off so scary yet ended so optimistically. The U.S. stock market dropped sharply on Monday on the news that Russian troops had moved into the Crimea, or as our government worded it, made “an uncontested arrival.” Soon there was talk of a possible invasion of eastern Ukraine.

While Vladimir Putin was ignoring Western leaders, he may have been paying attention to the financial markets. On Monday, the Russian ruble was the worst-performing currency in the world. The ruble, which is already down 10% this year, plunged to its lowest level ever against the dollar. In order to defend its currency, the Russian Fed jacked up interest rates by 150 basis points, from 5.5% to 7.0%. That’s a huge move, and it has a cost.

We don’t know for sure, but it’s estimated that the Russian central bank shelled out somewhere between $10 billion and $12 billion to defend the ruble. For now, Russia’s foreign currency reserves are large enough to take the hit, but they can’t keep it up forever. On Monday, the Russian version of the Dow Jones, the Micex Index, plunged 11% for its worst loss in more than five years. Interestingly, Bloomberg estimates that several Russian oligarchs lost billions of dollars due to the Crimean incursion. In other words, perhaps this arrival wasn’t entirely uncontested.

Well, somebody felt the heat, because on Tuesday we heard that Putin had ended Russia’s military exercises in western Russia. Everyone breathed a huge sigh of relief. Even though the Crimean crisis is still an issue, it doesn’t look like it will become something bigger and far more unpleasant. The S&P 500 celebrated on Tuesday by shooting above 1,870 to a new all-time high. It didn’t end there. On Thursday, the S&P 500 closed at yet another new all-time, 1,877.03. This is the index’s 50th record close in the past year. Since February 3, the S&P 500 has tacked on more than 7.7%.

In this week’s CWS Market Review, I’ll bring you up to speed on the big debate on Wall Street: How much is poor weather really to blame for the soggy economic news? I’ll also share more good Buy List news with you. Qualcomm announced a 20% dividend increase, DirecTV cracked $80 per share (it’s already a 16% winner in the year for us) and eBay is at a 14-year high. Not bad. But first, let’s look at why all the weather excuses may have been correct.

The Bad Weather Excuse Has Won the Argument

Over the last few weeks, there’s been a debate raging on Wall Street about the soft economic data. The last two jobs reports weren’t so hot. The bears have said that the economy is soft and getting softer. The bulls have blamed the weak numbers on lousy weather. So who’s right?

This is a hard debate to resolve, which is probably why it’s intensified. This week, however, we got some more data that indicates that the poor-weather thesis was probably correct. This is good news for investors, and it may suggest that 2014 will be the best year for the economy since the recession. In fact, in President Obama’s latest budget quest, he forecasts real growth of 3.1% for this year. That would be the fastest growth rate in nine years. Not only that, the president sees growth accelerating to 3.4% in 2015.

Of course, those are just forecasts, and worse yet, forecasts from politicians. But let’s look at some hard numbers. On Monday, the ISM Manufacturing Index, a report I follow closely, came in at 53.2, which was above the Street’s expectations of 52.3. Any number above 50 indicates an expansion, while one below 50 signals a contraction. This was an important report because the ISM for January was a dud—just 51.3. That report came out on February 3, which marked the S&P 500’s recent low. Now that we’ve seen a healthy rebound, I think it’s safe to say that the January report wasn’t the start of a new trend.

That’s not the only evidence. We also learned on Monday that real personal-consumption expenditures rose by 0.3% in January after a 0.1% pullback in December. On the other side of the ledger, consumer spending rose by 0.4% in January after a contraction of 0.1% the month before. The January spending was led by a 0.9% increase in services. That was the biggest jump in 13 years, and it was most likely due to a greater demand for utilities. In other words, folks were trying to keep warm. Another check mark for bad weather.

But the biggest evidence to support blaming the bad weather was this week’s Beige Book, which is a collection of regional surveys done by the Federal Reserve. Eight of the 12 districts reported modest economic improvement. New York and Philadelphia had slight declines, which they blamed on the weather. Kansas City and Chicago said they were stable. Consider this stat: The December Beige Book mentioned “weather” five times. That jumped to 21 times in January. In February, “weather” was mentioned 119 times.

The next big economic report will be the February jobs report. I’m writing this early Friday morning, and the jobs numbers come out at 8:30 ET, so you may already know the results (be sure to check the blog). As I mentioned earlier, the last two jobs reports were rather weak. The economy created 75,000 net new jobs in December and 113,000 jobs in January. That’s not so hot. Put it this way: The economy averaged more than 205,000 new jobs each month for the year prior to that. If we see a big increase in non-farm payrolls for February—say, over 200,000—then it would be another signal that the economy suffered a minor weather-related blip.

We got a sneak preview of the jobs report on Wednesday when ADP, the private payroll firm, said they counted 139,000 new jobs last month. However, the ADP report doesn’t always sync up with the government’s figures. But another promising number came out on Thursday: The number of Americans filing first-time jobless claims fell to 323,000, which is a three-month low.

Lately, a number of Wall Street firms have pared back their growth forecasts for Q1 GDP. Just a few weeks ago, Goldman Sachs had expected 3% growth. Now they’re at 1.7%. JPMorgan just cut their forecast from 2.5% to 2%. I don’t have a firm view just yet, but I’m beginning to think those forecasts are too pessimistic. Either way, we’ll get our first look at Q1 GDP in late April.

The bottom line is that a lot of the market’s resiliency this week was due to more than just the calming effect in Ukraine. Investors are beginning to realize that this might be a very good year for economic growth. Let me add another point about the current market. I caution you that I’m not a technical analyst, but many chart-watchers have been impressed by the breadth of this market. In other words, a rising tide is lifting a heckuva lot of boats. It’s not a rally led by a small number of monster-sized winners like we saw during the Tech Bubble. Now let’s look at how our Buy List has been faring.

Qualcomm Raises Its Dividend by 20%

The good news for the market has been even better news for our Buy List. We’ve beaten the S&P 500 for six of the last seven days. Through Thursday’s close, our Buy List is up 2.22% for the year, which is more than the S&P 500’s gain of 1.55%. This is a pleasant turnaround for us. Less than one month ago, we were trailing the index by close to 1%. I’ve also been impressed that our systemic risk (that’s beta for you smart kids) is less than the overall market’s.

Last week, we got a 17% dividend increase from Ross Stores ($ROST). This week, we got a 20% dividend increase from Qualcomm ($QCOM). I like this stock a lot. Their quarterly payout will rise from 35 cents to 42 cents per share. The board also approved a $5 billion increase to their buyback authorization. That brings the total authorization to $7.8 billion.

If you recall, just a few weeks ago, the company handily beat Wall Street’s earnings estimates and bumped up its full-year guidance. Qualcomm also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman. On Thursday, QCOM broke $77 for the first time in 14 years. Qualcomm remains a very good buy up to $79 per share.

Last week, I mentioned the public feud between Carl Icahn and eBay’s board. It got even nastier this week. The immediate positive for us is that the brawl has helped the stock. Shares of eBay ($EBAY) nearly cracked $60 this week.

Honestly, this fight is rather tedious, but I’ll boil it down for you. What happened is that eBay had bought Skype, but it didn’t do much for them, so they sold it for $2.75 billion to an investor group led by Mark Andreessen’s company (he serves on eBay’s board). Two years later, Microsoft bought all of Skype for $8.5 billion. Andreessen said that everything he did was above board and fully disclosed at the time.

Icahn ain’t buying it. In fact, he said that he’s “never seen worse corporate governance than eBay.” Really, Carl? Icahn’s goal isn’t a secret; he wants eBay to sell off PayPal, but the board has zero interest. Don’t get me wrong: I’m an Icahn fan. We need more people putting pressure on corporate boards, but even I concede that he can take things too far. Don’t expect a PayPal spinoff anytime soon. The board has made it clear that that’s a non-starter. My take: Ignore the bickering and concentrate the business. eBay remains a solid buy up to $62 per share.

More Buy List Updates

Several of our Buy List stocks have rallied strongly lately. Warren Buffett recently disclosed in his yearly Shareholder Letter that Berkshire Hathaway continues to have a big stake in DirecTV ($DTV). Buffett owns 22.2 million shares in DTV, which is 4.3% of the company. Last month, the satellite-TV crushed earnings by 23 cents per share. I also like that they’re really reducing share count with their buybacks. DTV is up 16% this year, and it’s our top-performing stock on the Buy List. This week, I’m raising our Buy Below price to $84 per share.

In January, Moog ($MOG-A) became our first dud of the year. The maker of flight-control systems missed earnings by a penny per share and guided lower for the year. The stock was clobbered and fell as low as $57 per share. But this is why we like high-quality stocks—they tend to rebound. (We just don’t know when.) Or as Peter Lynch put it in today’s epigraph, “the best stock to buy is the one you already own.” Moog shot up more than 5% on Tuesday and closed at $64.21 on Thursday. Moog continues to be a good buy up to $66 per share.

On Thursday, Wells Fargo ($WFC) got to a new high, as did Express Scripts ($ESRX). Remember it was only a few days ago that ESRX fell after its earnings report. Now it’s at a new high!

Also on Thursday, Oracle ($ORCL) came within 15 cents of hitting $40 per share. Larry Ellison’s baby last saw $40 in October 2000. The company will release its next earnings report after the closing bell on Tuesday, March 18. On the last earnings call, Oracle said to expect fiscal Q3 earnings between 68 and 72 cents per share.

I also want to remind you that Cognizant Technology Solutions ($CTSH) will split 2 for 1 on Monday. This means that shareholders will now own twice as many shares, but the share price will be cut in half, so don’t be surprised when you see the lower share price on Monday. The stock has recovered very impressively from its January sell-off. CTSH is currently up more than 20% from last month’s low. I’m raising my Buy Below on Cognizant to $112 per share, which will become $56 per share on Monday. This is a great stock.

That’s all for now. Next week will be a slow week for economic news. I’ll be curious to see the retail-sales report which is due out on Thursday. This will give us a clue as to how strong consumer spending is. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on March 7th, 2014 at 8:53 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: DTV, EBAY, QCOM